21 Feb 2013

January borrowing figures surplus higher than expected

The Office of National Statistics reports a budget surplus of £11.4bn, boosted by tax receipts and the first payment of interest from the Bank of England’s quantitative easing program.

In the final set of borrowing figures before next month’s budget, the Office of National Statistics reported a net surplus of £11.4bn, compared with £6.4bn a year earlier.

The figures have been boosted by a seasonal surge in tax revenues, as well as a £3.8 billion cash injection after payment of interest from the Bank of England’s quantitative easing programme was included this year for the first time.

The Office for National Statistics said that once special factors such as the transfer of the Royal Mail pension fund and QE profits were excluded, the budget deficit for the first 10 months of the 2012-13 financial year was 6.6% higher than in the same period of 2011-12.

“There is a modest trend improvement in the public finance figures, but until we’ve got past all these weird and wonderful one-offs, we can’t get an accurate picture of what’s really going on,” Peter Dixon, an economist at Commerzbank AG told Reuters.

“Weakness in the economy will continue to constrain the government’s ability to bring down the deficit as fast they’d like. Any rating downgrade will depend on what Osborne says in the budget, but on a multiple-year horizon there is close to a 50 percent chance of a cut.”

Accusations of ‘smoke and mirrors’

The inclusion of gilt-coupon income from the Bank’s QE programme has raised questions about the validity of future economic projections. Today the ONS said only £6.4 billion of the OBR’s estimated £11.5 billion surplus can be used to reduce debt.

The figures were released a day after it was revaled that the auction of 4G mobile airwaves raised £2.3 billion, smaller than the £3.5 billion estimated by the OBR in the autumn statement.

No sleight of hand - Vince Cable defends the Chancellor's overestimation of 4G auction proceeds 

Critics believe the contributions of various asset sales has made the figures more difficult to interpret.

Duncan Weldon, senior economist at the TUC, said: “The various ‘special factors’ such as the treatment of QE cash, Northern Rock and Bradford & Bingley, and the changes to the Royal Mail pension scheme all make the data even harder to interpret.

“Unsurprisingly, and especially after yesterday’s 4G auction flop, the government is hailing record receipts for January. But rather than looking at one month in isolation it is better to look at the financial year so far and compare it to the previous year.

“Here we can see that revenue from taxes on income and wealth are down by 2.3 per cent in 2012/13 so far, whilst social security spending is up by 5.9 per cent. A weak economy is means less tax revenues and more social security spending and, on the today’s numbers, it looks like public sector borrowing is on course to rise this financial year.”

AAA rating at risk

Chris Williamson, chief economist at Markit, estimated Mr Osborne is likely to miss his borrowing target by between £5 billion and £10 billion and warned the UK’s AAA credit rating is “looking increasingly at risk”.

He added: “The spring budget will need to address the concern that more stimulus is needed besides central bank action in order to get the economy on a sustainable recovery path.

“Without a credible plan from the government to break the vicious circle of a sluggish economy, low tax revenues and rising public sector borrowing, the credit rating agencies are likely to lose their patience.”

A Treasury spokesman insisted today’s public finance figures showed an improving picture, adding they “underline what the governor of the Bank of England said last week: the road ahead will be difficult, but the economy is on the right track”.